Rio's Mixed Production Half Year

Rio Tinto, currently in the news because of Chinese government claims of bribery of steel industry executives by some of its executives there, is looking at a lower half year profit, judging by the June quarter and first half production review released yesterday.

Second quarter iron ore output rose 8% and Rio expects the recovery in Chinese steel demand to continue in the current half.

That's being reflected in rising spot prices (including freight) for iron ore, with prices now around $US85 to $US90 a tonne, compared with the 2009 Japanese contract price of $US62 a tonne.

Production of the ore, Rio's major profit contributor, was 45.2 million tonnes in the three months to June 30, up from 41.9 million tonnes in the same quarter of last year.

But first half production this year of 76.80 million tonnes, was down 3% on the 79.23 million tonnes of the same half of 2008.

It reaffirmed full-year output guidance of 200 million tonnes.

Rio said around 50% of first half production (or around 38 million tonnes) was sold on spot markets in the six months.

Rio CEO Tom Albanese said in a statement in the review:

"Markets remained tough in the second quarter, as expected, particularly in aluminium.

"The production curtailments announced in January in this product group have started to take effect and are reflected in this report.

"We continue to press ahead with actions to reduce costs across the board, align production with demand, and bring down levels of net debt," he said.

Rio completed the US$15.2 billion rights issue earlier in July and during the course of this year agreed to sell assets valued at $US3.7 billion, including $US1.2 billion for the Alcan Packaging Food Americas division announced on 6 July and its undeveloped potash assets in Argentina and Canada for $US50 million (and a profit of $US797 million).

On June 5, Rio Tinto announced that it had entered a non-binding agreement with BHP Billiton to establish a production joint venture of both companies' Western Australian iron ore assets.

That was the deal that allowed it to wriggle away from Chinalco and its $US19 billion of cash and capital.

Rio Tinto's said its global iron ore production was up 8% compared with the second quarter of 2008.

Pilbara iron ore production of 53 million tonnes (42 million tonnes on an attributable basis), up 11% on the second quarter of 2008, reflected operations running at full capacity.

During the second quarter, Rio Tinto settled 2009 iron ore supply contracts with Japan, Korea and Taiwan.

Deliveries continue to other customers on a provisional price or spot sales basis.

Approximately half of the iron ore that Rio Tinto has produced this calendar year has been sold on a spot market basis.

The delivered iron ore spot price has risen in line with rising freight rates, while on an FOB basis spot prices have remained relatively flat during the quarter.

Record second quarter production of 53 million tonnes (42 million tonnes on an attributable basis) was 47% higher than the previous quarter, and represented an 11% increase on the corresponding quarter of 2008.

Total shipments from the Pilbara region of Western Australia during the second quarter totalled 52.5 million tonnes, 33% higher than the previous quarter, and a 14% increase on the same quarter of 2008.

Rio Tinto's iron ore guidance for its global operations in 2009, incorporating Australia, Canada and Brazil, remains around 200 million tonnes (on a 100% basis) with the recovery in Chinese steel demand expected to continue into the second half of 2009.

Following production cutbacks in response to the sharp fall in demand, bauxite production was down 14%, alumina down 6% and aluminium down 5%, compared with the second quarter of 2008.

Second quarter trading in the aluminium business continued to experience difficult conditions and showed a slight improvement on the first quarter of 2009.

In the light of very difficult trading conditions, management has implemented a widespread programme of closures and curtailments to reduce the cost of production.

Bauxite production has been reduced by 5 million tonnes, high cost alumina refining capacity has been cut and a total of approximately 450,000 tonnes or 12% of smelting capacity is expected to have been divested, idled or shut down by the end of 2009, including the anticipated cessation of primary smelting operations at Anglesey, the Beauharnois closure, and production curtailments at higher cost smelters in Europe and Canada.

Rio said that over 80% of its aluminium metal capacity is positioned in the lower half of the industry cost curve.

"With these actions, 42% of Rio Tinto Alcan's smelting capacity in the upper half of the cost curve has been either sold or curtailed.

"Cost reduction measures will lead to an improvement in margins against a backdrop of strengthening Canadian and Australian currencies.

"These foreign exchange effects, together with the non-cash impact of balance sheet translation movements and other non cash effects, are expected to have a negative impact on EBITDA in the first half of 2009."

Rio Tinto Alcan's said its aluminium production capacity is expected to be operating at a 12% lower annual run rate by the end of 2009.

"Production in 2009 is expected to be 3.8 million tonnes (Rio Tinto share), a decline of six per cent compared with 2008," the company said.

Rio said that mined copper production was down 1% on the second quarter of 2008.

Recovery in copper grades at Kennecott Utah Copper and Grasberg, were offset by lower copper grades and continued operational issues at Escondida where recoveries and output both fell.

Refined copper production was up 23% on the second quarter of 2008 from improved performance and higher concentrate grades at Kennecott Utah Copper and higher cathode production at Escondida.

Rio said that its 2009 share of mined and refined copper production is expected to be 780,000 tonnes and 425,000 tonnes, respectively.

In diamonds, prices and sales volumes "Have been severely impacted by the economic downturn.

"The effect on the rough diamonds market has been exacerbated by the lowering of inventory levels in the diamond pipeline, resulting from reduced global liquidity," Rio said.

"Second quarter carat production at Argyle declined by 86 per cent compared with the same quarter of 2008.

"This followed the previously announced maintenance shut at the processing facilities from March to May 2009. Processing recommenced in June.

"Second quarter production at Diavik was 44 per cent lower than the same quarter of 2008 with operations scaling back production in response to the economic slowdown. In addition, a higher proportion of the ore was sourced from the lower grade A418 pipe.

"The first of two six week shutdowns commenced on 14 July.

"Diamond production has ceased temporarily and the mine has been placed on a care and maintenance schedule. Following these measures, Diavik is expected to produce between five and six million carats (100 per cent basis) of rough diamonds in 2009."

Rio said its Australian hard coking coal output was down 7% on the second quarter of 2008 while Australian thermal coal production was up 3% on the same period.

"Second quarter production and shipments at Rio Tinto Energy America (RTEA) declined by five per cent compared with the corresponding quarter of 2008.

"The economic downturn has reduced the demand for coal-fired power and some customers have switched to lower cost natural gas usage.

"Hard coking coal production from the Queensland coal operations decreased by seven per cent, compared with the same quarter of 2008 due to the impact of wet weather. 2009 production at Kestrel is forecast to be in line with 2008 production albeit with a higher proportion of thermal coal in 2009.

"Higher production of hard coking and thermal coal compared with the first quarter of 2009 was attributable to improved mining conditions and improved demand for coking coal.

"An investment programme by the owners and operators of the coal ports at Newcastle and Dalrymple Bay is expected to be completed by the end of the third quarter of 2009 which will increase capacity at the coal terminals."

Rio said its share of second quarter uranium production was 16% higher than the corresponding quarter of 2008.

ERA production increased by 33% due to an improvement in ore grade and plant utilisation, as well as commencement of operation of the laterite processing plant.

Marginally lower production at Rössing was attributable to a 14 day planned shutdown in June, partly offset by continued access to higher grade ore.

Pre-tax and pre-divestment expenditure on exploration and evaluation charged to the profit and loss account in the first half of 2009 was $242 million compared with $401 million in same period of 2008.

During the first half of 2009 the Group realised $73 million (pre-tax) from the divestment of exploration properties.

Exploration and evaluation expenditure across the Group has been scaled back in 2009, in line with the announcements on the Group's commitment to reduce controllable operating costs by at least $2.5 billion per annum in 2010.

The 2009 central budget for greenfield exploration has been cut by approximately 60% to $100 million (before tax and divestment proceeds).